Clever Geek Handbook

10 ways to protect the intellectual property of an IT startup

image



The problem of protecting intellectual property (hereinafter - IP) is often one of the most important issues that any technology startup faces. This is closely related to the product development process, hiring qualified employees, raising capital and many other issues of the project development.



Given the complexity of these processes, intellectual property may seem premature, expensive, or even contrary to the goal of bringing a product to the market earlier than any of your competitors.



However, intellectual property is often the most valuable asset of an IT startup. Therefore, the protection of intellectual property is of great importance for obtaining venture financing or preventing unfair competition, during which your decisions will simply be copied.



In this article, I propose 10 simple rules for protecting intellectual property that can be implemented effectively.



1. Try to do a job separately from the work of your startup



Of course, it is quite difficult and psychologically uncomfortable to refuse the current salary and risk working for a long time on a startup without payment. However, one of the biggest mistakes at the beginning of the campaign is when the founder starts working on his new idea at the same time as he continues to work for someone else. And that's why.



Conflicting obligations may jeopardize the ownership of the intellectual property of your new company. It is important to know what has been done, what resources have been used, and where the fundamental work has been done. Check your employment obligations, including those related to the transfer of intellectual property rights. Most companies require their employees to sign the Confidentiality and Invention Definition Agreement, in which the employee acknowledges and agrees that any new ideas and inventions developed by the employee related to the employer's business belong entirely to the latter.



If the employer does not directly approve of third-party projects (without requiring ownership), it would be a bad idea to use company resources and time to do something different from your daily work. Many people do not want to tell their employer about their new idea, but keep their project “in focus” while they work. This may subsequently become a problem, especially if the new enterprise is closely connected with the business of the previous employer.



Therefore, we recommend separating hired work from work on your own project. And if they can be connected, then immediately agree on this with your employer. If such an agreement is impossible for some reason, then as soon as possible go into “free swimming”, because it will be not only more honest in relation to your employer, but also more productive for your new project, to which you can devote all your time, and, accordingly, you will achieve the desired result faster.



2. Do not allow other people to participate in your intellectual property or own your company



Some of the best new ideas are developed through conversations with friends, in dorm rooms or with other entrepreneurs over coffee or other drinks. Face it: it’s very exciting and interesting to talk about new ideas of your own and to follow the path of their development before other people. The informality of these discussions often makes friends or colleagues with you spontaneously apply for financing, act as co-founders and freely talk about shares in your company. It's fine. But it will be even more beautiful if you do not have a different understanding of your own participation in the education and development of a new startup. You must resolve many complex issues together before registering a new company.



When you really have a co-founder (business partner) who is ready to develop a joint project with you, I recommend immediately agreeing on the conditions of your relationship on mutually beneficial conditions. Please try to very clearly and in detail define your areas of responsibility and the immediate responsibilities of the project. To do this, you will first need to fully describe them. I highly recommend doing this in tight connection with the business plan and timing of your project. After that, it will be possible to distribute all the work and outline complex issues for the solution of which you will not have enough competencies, funds or time. Attract additional people on certain conditions. Subsequently, it will be necessary to constantly return to these agreements so that there is no misunderstanding in cases if something went wrong.



Ignoring these issues can cause enormous problems later related to mutual claims and conflicts of interest. Moreover, the more successful the project, the more there will be mutual claims about which there were no clearly fixed agreements.



In this sense, it’s very useful to talk about the founding agreement of your startup as a form of a “marriage contract”. Everyone wants to live happily ever after, but few people have the wisdom to understand and agree at the beginning of the road who will achieve this and how.



Here are the key terms of the transaction that you need to consider in a written agreement with the founder:





An informal or vague understanding that is not carefully coordinated and documented is fraught with potential risks of complete destruction of the business.



A separate question, if you decide to start a startup with friends and acquaintances: be careful when discussing property ownership and information exchange. Keep your own notes about where the ideas came from, as well as about any discussions, about the shares in your startup.



It is desirable that this would look like short protocols drawn up after the most important meetings that everyone would see and sign. If at such meetings a proposal was received from a potential source of financing, then it will be necessary to keep a copy of the signed protocol for demonstration to future investors who will be very interested in such information.



And another important point: if something changes and your friend or colleague will no longer participate in your project (and you did not plan to leave), then make sure that you send a message in writing that clearly demonstrates your understanding of the main idea of ​​the project what is yours and what is not.



Remember that if you have an idea for a billion dollars, it is cheaper and more cost-effective to solve such problems at the start than when you apply for an IPO or receive an offer to buy your startup from Zuckerberg or Gref.



3. Let the participants bring their own intellectual property to the startup



A number of different stakeholders can contribute different intellectual property to your new joint venture. In addition, innovation often occurs just before the formation of the company. As a rule, IP rights belong to the person (for example, the developer or designer) who created the product before agreeing with potential partners. Moreover, in some cases it is difficult to maintain (or prove) the right to IP to employees who develop inventions in their own time, do not use the equipment, supplies or equipment of the company in which they worked before the startup.



This means that if your participants can bring their own intellectual property to the company, this should be fixed in the constituent documents and not contradict the confidentiality agreements signed by them at their previous place of work. Otherwise, their former employers will remain the sole owners of these IP rights, and your startup will not have any reason to use this asset.



In this sense, written agreements can at least somehow guarantee that all IP rights are transferred directly from the founders to the company.



In addition, it is very important in these agreements to determine the type of IP ownership.



Ensuring that a startup owns IP rights is critical. It is important to clearly identify who and what belongs. A startup should take the following steps to ensure that it owns the intellectual property necessary for its business:





These agreements should also include the following:





4. Evaluate your core assets and determine which type of IP protection will be most effective.



Cash rules in startups ball. IT startups may be tempted to defer investment in protecting intellectual property. For those who have not tried to protect intellectual property, the procedure seems complicated and expensive. Too often, startups end up losing their intellectual property rights, neglecting the rules for protecting it.



The simple and cost-effective methods described here can minimize future problems and protect fixed assets. A good starting point is to critically evaluate your company's value proposition and intellectual property assets, which are critical to these value propositions. This type of valuation is useful in raising investment funds and can be critical to protecting your core assets.



Sometimes companies find that patent protection is the only way to protect themselves. Technology startups often ignore the value of non-proprietary IP. Although patents can be incredibly valuable, it does not necessarily guarantee that a company's product is a good product, and moreover, that it will sell well. Trade secrets, cybersecurity policies, trademarks and copyrights may be forms of intellectual property that can be protected. Spend a little time evaluating the company's value proposition and the best way to protect it, which can be very important for a long time.



Here is a summary of the types of intellectual property available:



Patents are the best protection you can get for a new product, especially if it has no analogues in the place where you intend to implement it. A patent gives its inventor the right to prohibit other persons from producing, using or selling the patented object described by the words in the claims. Patents are temporary protection and limited by the territory in which it was obtained. That is, you can register a patent only for a certain time and for a certain territory. Therefore, it is imperative to have a patent lawyer to prepare an effective application.



The key questions in determining whether a patent can be obtained are the following:



  1. Only a specific version of an idea, formula or product is patentable;
  2. An invention must be new or innovative;
  3. The invention should not be patented or described in a print publication earlier;
  4. An invention should have some useful purpose.


Copyright applies to original copyright works. For example: works of art, advertising copies, books, articles, music, films, software (code), etc.



Copyright gives the owner the exclusive right to make copies of the work and prepare derivative works (such as sequels or editions) based on the work.

In addition, you can take ownership of copyright (for example, a code or a book) into a separate type of activity, register for this a separate company in a country that attracts owners of qualified assets (IP box) with lower tax rates on profits for using such rights. These countries include. for example: Cyprus (2.5%), Poland (5%), Hungary (4.5%) and Switzerland since 2020 (but only for patented inventions).



The only moment, try to ensure that this type of activity does not bring the company more than 25% of its profit, because otherwise, the company will be recognized as passive and information about its income will be automatically received by the tax authorities of the country, where the founders (beneficiaries) are tax residents.



Next, double tax treaties will apply, if any. But, this is a slightly different story that needs to be considered in a separate article.



The right to a trademark or mark protects the symbolic meaning of a word, name, symbol or device that the trademark owner uses to identify or distinguish his goods from competitors' products. Some trademarks are world famous, such as the Intel, BMW, or Nike trademark. You get trademark rights by actually using it in trade. You do not need to register a mark in order to obtain rights to it, but, in some cases, state registration does provide some advantages. It depends on the legislation of a particular country.



Trade secrets or trade secrets can be a great asset for startups. They are cost-effective and work as long as trade secrets remain confidential and gain value due to their secrecy. The trade secret right allows the right holder to take action against anyone who violates the agreement or confidential relations, or who steals or uses other illegal means to obtain classified information. Trade secrets can range from computer programs to customer lists to Coca-Cola formulas.



Confidentiality agreements. They are also called non-disclosure agreements. The purpose of such an agreement is to provide the holder with confidential information (such as a product, service or business idea) so that he cannot share it with a third party. Usually there are standard exceptions to confidentiality obligations (for example, if the information is already in the public domain).



I highly recommend that every employee or consultant sign such an agreement as described above.



Terms of Service and Privacy Policy. If you are a company that conducts business on the Internet, it is important to have an agreement on the terms of service that limits the actions that users may or may not do on your website, as well as with information on your website.



Knowing your IP and how it is protected is often a very significant issue for investors and acquirers. These assets often need to be disclosed using a “disclosure schedule”. To convince potential investors that the company knows what it possesses, it is recommended to store copies on a secure server:





5. Make sure you have a different brand name



Your brand can be very valuable in the market. Startups should make sure that their name and any logos are understandable for commercial use. Here are some of the steps to avoid name problems:





If names and logos are available for use, a startup must register it as a trademark. In addition to the fact that competitors cannot use the company name, trademarks help the young company create a unique and recognizable brand. This, in turn, contributes to the visibility and recognizability of a startup in the market and ultimately affects not its ability to grow.



6. Patent strategy should be cost-effective



When choosing a patent strategy, consider your market vision and the cost-effectiveness of patent protection for your products. This does not mean that you should avoid it. You must correlate the lifespan of your product or service with the market where you will sell them. It is possible that you simply won’t need to apply protection against competitors with the help of a patent because your product will be outdated much faster than the period for which your patent will be issued.



Everything should have appropriate rationality and profitability. Patents should be a valuable asset to the company for specific purposes. For example, patent portfolios are often understood as exceptional benefits for:





However, patents also have extensive protective advantages from raiding and scammers. For example, a protective patent portfolio can serve as an important trump card if your startup is threatened with a violation of a foreign patent. This can lead to a number of unpredictable and not always favorable consequences for your project, including, for example, problems with regular customers, especially if it’s large or state-owned corporations or vice versa, will create the basis for cross-licensing negotiations or even a merger with your competitor .



Your own patent portfolio, at a minimum, can allow you to file a counterclaim if any lawsuit is brought against you.



Frequently Asked Question: How many patents should I file?



Many companies spend huge amounts on a wide area of ​​patents. Others spend nothing. Usually both of these solutions are a mistake. As a technology startup, developing a wide portfolio of patents takes a lot of time, is expensive, and is unlikely to provide a return on investment in the short term. Filing a large number of cheap, but poorly written patents also rarely creates value for startups.



The best practice is to search for patents aimed at the core value of your innovation. Essentially, this process involves finding patent applications that can truly be tracked. In other words, you should be able to learn enough about a competing product to see if another company is violating any of your intellectual assets.



If you find this situation, you can start the patent protection process. For example, you can submit a short and focused document called an “advance application”. A preliminary statement is simply a description (it may even be a guide or a preliminary outline) of your technology and how it works. This pre-registration can usually be used to show when you invented your technology, and it gives you a year before you have to collect the more expensive formal patent documentation needed for the patent application process.



Some companies fear patent trolls because of the nature of their business. Having your own patent is not necessarily protection against someone else’s claim. If you are worried about patent trolls, then appreciate the inexpensive services that can help you. Although patent infringement insurance is often expensive and difficult to find, there are many other low-cost or free strategies to insure against the risk of attack by legal criminals. Some patent offices generally provide free protection for small startups.



7. Think of a global patent strategy, including protection from China



A global patent strategy, even in its early stages, can be an important factor for the survival and growth of a startup. Seeking to protect their inventions quickly and effectively, startups often do not pay attention to international standards of protection. Accordingly, in the future, when a startup expects to begin expansion into international markets, it may be stuck without protection in countries important to it. Filing an application without understanding what international protection is required by the company can lead to expiration of the international application deadline, depriving the company of international protection. At a minimum, talk with your patent agent about the international protection of your IP.



If your company is a manufacturer of physical durables, then you should consider obtaining patent protection in China. Many people believe that there is no escape from copying your products by Chinese companies. In fact, this is not so.



While striving to protect intellectual property in China is not an easy task, local patent law has evolved rapidly in recent years. Chinese patents are often relatively inexpensive to obtain. If you plan to locate production in China, then having local patents can be very useful.



In addition to the above, a well-structured global IP ownership structure can lead to a significant reduction in tax costs, which we wrote about in paragraph 4 above regarding copyright.



8. Be careful when using open source software.



When developing software, startups may decide to incorporate third-party open source software into their code. Using such code is usually free and often can significantly speed up development. However, open source licenses need to be carefully studied. If the open source code is used in a manner not permitted by the license, then startups may face threats of breach of contract or copyright infringement.



Moreover, in some cases, with certain open source licenses, using open source code in a customized launcher product may inadvertently convert your own launcher code to open source software. Not only will IP protection be lost, but your confidential launch code can be made public. Accordingly, any software company should be aware of the risks and adopt a rigorous protocol on how and when its developers can use open source.



9. Only in rare cases, allow IP litigation



Lawsuits are a waste of money and time that can distract company employees.For example, most often emotions flare up when one of the founders or key employees leaves the company in doubtful circumstances, a business partner breaks a deal or a patent troll sues you for an exorbitant amount. The board of directors is annoyed, the employees are angry and there are some “political” arguments that cause strong emotions, and there is a general feeling that we need not to develop the project, but to deal with this situation.



Except in rare cases, a principled fight against the IP situation is a mistake. The company will spend a ton of money and focus core staff on litigation, rather than on startup growth. Litigation is usually slow and expensive. At the beginning of the case, the principle really matters to enterprise managers. After months of spending on legal services and a lack of progress in business, a company often feels completely different. If you feel the need for a lawsuit, make sure you figure out everything strategically.



Very often, trials can be effective only when the advantage is very significant, and can also be easily and quickly achieved.



Try to solve all the problems in the negotiations. The right strategy will strengthen the positive information field around you, find new interested customers and even attract a new round of investment.



10. Be careful when hiring new employees.



You should be extremely careful when hiring new employees, especially from competitors. Do you want to avoid litigation by the previous employer that your company uses its confidential information? In this regard, check the following:





As can be concluded from these rules, a strategy to protect correctly defined intellectual property can solve the following problems:





Please note that compliance with these rules does not require large expenses, but only focuses on such an important aspect of the activities of any startup as protecting intellectual property, which in many cases underlies the success or failure of innovative projects.


More articles:


All Articles